Sydney's housing slide is one more reason for rates to stay on hold

6 August 2018 — 1:04pm

Sydney's bubbly house prices are sinking and tipped to fall for at least another year, pushing the central bank even further to the sidelines.

Given Australia's tepid wages, tame inflation, range-bound currency and exposure to a global trade war, governor Philip Lowe and his board are almost certain to keep the benchmark cash rate at a record-low 1.5 per cent when they meet on Tuesday.

RBA governor Philip Lowe and his board are almost certain to keep the benchmark cash rate at a record-low 1.5 per cent when they meet on Tuesday. Credit:Bloomberg

Throw in the precedent that the Reserve Bank of Australia hasn't raised rates while property prices in the nation's largest city were falling at any time this century and the hold is all but guaranteed.

Tuesday will mark two years of record-low interest rates - a record stretch. But cheap cash is no longer fuelling housing after values along with debt reached stratospheric levels. Economists surveyed by Bloomberg predict that prices won't start rising again until at least 2020. The harbour city in July posted its biggest decline in values since 2009.

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"The weakness is becoming further entrenched," said Daniel Blake, a strategist at Morgan Stanley in Sydney. "We remain alert to any impact from a sharper tightening in credit or exogenous weakening in the broader economy that could accelerate declines and spark a negative feedback loop between the housing market and indebted consumer."

Prices in Sydney certainly needed a breather after rocketing 80 per cent since the RBA began its easing cycle in November 2011, with southern rival Melbourne seeing a 60 per cent jump. But just as policy makers were keen to avert a bubble by implementing lending curbs, they similarly want to avoid a disorderly retreat that could leave borrowers under water and reverberate across the wider economy.

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The stabilising factor has been unemployment holding in a tight and low range - by Australian standards - of 5.4 to 5.6 per cent for the past year. That gives Lowe and his colleagues confidence that households can meet their obligations and that a degree of demand will remain in the property market. Most importantly, it averts the risk of forced sales due to job losses that could send prices into a downward spiral.

More workers

The RBA forecasts unemployment will grind down slowly to 5.25 per cent by June 2020 and releases updated forecasts on Friday. The reason for the conservative estimate is that whenever there is a burst of hiring, the participation rate also tends to rise, preventing a bigger drop in unemployment. Similarly, labour market weakness tends to be concealed by gains in part-time employment and fewer hours worked.

That's left the country with a high underutilisation rate - which combines unemployment and underemployment - and has kept a lid on income growth. Australia's real wages have been stagnant for the past five years and inflation, in turn, has been subdued.

Lowe's view is that wage growth will need to quicken to 3 per cent or better in order to bring inflation back to the middle of the RBA's 2 to 3 per cent target and lay the ground for what would be the first interest rate increase since 2010. Core inflation has remained below the bottom of the target for 2½ years.

Smokes, power

The major consumer-price drivers in Australia have been tobacco and energy. But with rising taxes making cigarettes increasingly too expensive and the government trying to push down energy costs ahead of an election due by May, their impact will be reduced. That leaves wages to drive inflation and to do so would require unemployment below 5 per cent, or so the RBA estimates.

Bill Evans, chief economist at Westpac, has noted that in the past two elections, hiring collapsed in the six-month period around voting day as businesses turned jittery. A similar outcome next year - which is likely given opinion polls suggest a tight race - could push up the jobless rate and decrease the likelihood of faster wage gains.

"If businesses acted cautiously during the lead up and the aftermath of the last two federal elections then we cannot rule out a repeat in 2019," Evans said.

Between falling house prices, potentially weaker hiring and economic growth, and concerns about the outlook for household spending - Australia's debt-to-income ratio is a record 190 percent and among the world's highest - tighter policy looks even further in the distance. Traders certainly see little chance of a rate hike in the next 12 months.